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August 25, 2007

Funding microfinance firms

Business Standard columnist Key Sarkar has an interesting piece on the experience of funds like Bellwether, Unitus and Lok Capital which fund microfinance companies.
One of the big realisations Bellwether had, according to Prasad, was that transforming NGOs into for-profit MFIs is hugely time-consuming. While the statutory requirements of changing the legal identity have a time cost certainly, what really was more time-consuming than planned was bringing about the change in attitude. Transforming accounting systems and human resource management in existing NGOs actually took 70 to 80 per cent of the time earmarked for these companies.

What came as a very pleasant surprise and was an absolute delight, according to Prasad, was the quality of people promoting MFI start-ups. The fact that people with valuable corporate experience are setting up MFIs is a trend unique to India.

...Mehta says that from his deals in the pipeline and the proposals that they get, it may be that MFIs working in the urban areas would proliferate. A lot, however, remains to be learnt on how the urban poor will behave and what impact it will have on MFIs. Start-up MFIs like Ujjivan or Arohan or even Janalakshmi would be important sources of data to understand how these MFIs will fare.

Although Prasad and his team did realise that in order to sustain healthy growth of their investee companies they would need to fund support companies focused on the MFI sector like software companies, credit bureaus or training institutes, they have not been lucky in finding such companies to support. “We will need to market ourselves better to promoters who are thinking of setting up such companies,” admits Prasad.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.